COLGATE PALMOLIVE CO

Transcription

1 COLGATE PALMOLIVE CO FORM 10-Q (Quarterly Report) Filed 04/25/13 for the Period Ending 03/31/13 Address 300 PARK AVE NEW YORK, NY Telephone CIK Symbol CL SIC Code Perfumes, Cosmetics, and Other Toilet Preparations Industry Personal & Household Prods. Sector Consumer/Non-Cyclical Fiscal Year 12/31 Copyright 2013, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

2 (Mark One) UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2013 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to. OR Commission File Number: COLGATE-PALMOLIVE COMPANY (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 300 Park Avenue, New York, New York (Address of principal executive offices) (Zip Code) (212) (Registrant s telephone number, including area code) NO CHANGES (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( ) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Indicate the number of shares outstanding of each of the issuer s classes of common stock, as of the latest practicable date: Class Shares Outstanding Date Yes No Common stock, $1.00 par value 466,368,867 March 31, 2013

3 PART I. FINANCIAL INFORMATION COLGATE-PALMOLIVE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited) Three Months Ended March 31, Net sales $ 4,315 $ 4,200 Cost of sales 1,800 1,763 Gross profit 2,515 2,437 Selling, general and administrative expenses 1,536 1,478 Other expense, net Operating profit Interest (income) expense, net (3) 10 Income before income taxes Provision for income taxes Net income including noncontrolling interests Less: Net income attributable to noncontrolling interests Net income attributable to Colgate-Palmolive Company $ 460 $ 593 Earnings per common share, basic $ 0.98 $ 1.24 Earnings per common share, diluted $ 0.97 $ 1.23 Dividends declared per common share* $ 1.30 $ 1.20 * Two dividends were declared in each period. See Notes to Condensed Consolidated Financial Statements. 2

4 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Millions) (Unaudited) Three Months Ended March 31, Net income including noncontrolling interests $ 506 $ 633 Other comprehensive income, net of tax Cumulative translation adjustments (55) 179 Retirement Plan and other retiree benefit adjustments Gains (losses) on available-for-sale securities (4) 10 Unrealized gains (losses) on cash flow hedges 2 5 Total Other comprehensive (loss) income, net of tax (37 ) 208 Total Comprehensive income including noncontrolling interests Less: Net income attributable to noncontrolling interests Less: Cumulative translation adjustments attributable to noncontrolling interests 2 Total Comprehensive income attributable to noncontrolling interests Total Comprehensive income attributable to Colgate-Palmolive Company $ 423 $ 799 See Notes to Condensed Consolidated Financial Statements. 3

5 CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Millions) (Unaudited) March 31, 2013 December 31, 2012 Assets Current Assets Cash and cash equivalents $ 932 $ 884 Receivables (net of allowances of $69 and $61, respectively) 1,808 1,668 Inventories 1,371 1,365 Other current assets Total current assets 4,828 4,556 Property, plant and equipment: Cost 7,877 7,821 Less: Accumulated depreciation (4,057) (3,979) 3,820 3,842 Goodwill, net 2,451 2,500 Other intangible assets, net 1,465 1,499 Deferred income taxes Other assets Total assets $ 13,533 $ 13,394 Liabilities and Shareholders Equity Current Liabilities Notes and loans payable $ 12 $ 54 Current portion of long-term debt Accounts payable 1,237 1,290 Accrued income taxes Other accruals 2,268 1,888 Total current liabilities 4,091 3,736 Long-term debt 5,095 4,926 Deferred income taxes Other liabilities 2,042 2,049 Shareholders Equity Common stock Additional paid-in capital 1,563 1,551 Retained earnings 16,805 16,953 Accumulated other comprehensive income (loss) (2,658) (2,621) Unearned compensation (35) (41) Treasury stock, at cost (14,636) (14,386) Total Colgate-Palmolive Company shareholders equity 1,772 2,189 Noncontrolling interests Total shareholders equity 2,019 2,390 Total liabilities and shareholders equity $ 13,533 $ 13,394 See Notes to Condensed Consolidated Financial Statements. 4

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7 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) See Notes to Condensed Consolidated Financial Statements. 5 Three Months Ended March 31, Operating Activities Net income including noncontrolling interests $ 506 $ 633 Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations: Depreciation and amortization Restructuring and termination benefits, net of cash 30 (17) Stock-based compensation expense Venezuela devaluation charge 172 Deferred income taxes (17) 22 Cash effects of changes in: Receivables (175) (90) Inventories (15) (38) Accounts payable and other accruals 112 (35) Other non-current assets and liabilities Net cash provided by operations Investing Activities Capital expenditures (94) (60) Purchases of marketable securities and investments (199) (51) Proceeds from sale of marketable securities and investments Other 7 38 Net cash used in investing activities (232) (41) Financing Activities Principal payments on debt (1,436) (1,013) Proceeds from issuance of debt 1,553 1,183 Dividends paid (290) (278) Purchases of treasury shares (385) (463) Proceeds from exercise of stock options and excess tax benefits Net cash provided by (used in) financing activities (462) (465) Effect of exchange rate changes on Cash and cash equivalents (35) 10 Net increase (decrease) in Cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period $ 932 $ 1,044 Supplemental Cash Flow Information Income taxes paid $ 182 $ 223

8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The Condensed Consolidated Financial Statements reflect all normal recurring adjustments which, in management s opinion, are necessary for a fair statement of the results for interim periods. Results of operations for interim periods may not be representative of results to be expected for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation. For a complete set of financial notes, including the significant accounting policies of Colgate-Palmolive Company (together with its subsidiaries, the Company or Colgate ), refer to the Company s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission. 2. Use of Estimates Provision for certain expenses, including income taxes, media advertising and consumer promotion, are based on full year assumptions and are included in the accompanying Condensed Consolidated Financial Statements in proportion with estimated annual tax rates, the passage of time or estimated annual sales. 3. Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No , "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU No requires presentation of reclassification adjustments from each component of accumulated other comprehensive income either in a single note or parenthetically on the face of the financial statements, for those amounts required to be reclassified into Net income in their entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety in the same reporting period, cross-reference to other disclosures is required. As permitted under ASU , the Company has elected to present reclassification adjustments from each component of accumulated other comprehensive income within a single note to the financial statements effective January 1, Refer to Note 10, Other Comprehensive Income. 4. Acquisitions and Divestitures Sale of Land in Mexico On September 13, 2011, the Company s Mexican subsidiary entered into an agreement to sell to the United States of America the Mexico City site on which its commercial operations, technology center and soap production facility are located. The sale price is payable in three installments, with the final installment due upon the transfer of the property, which is expected to occur in During the third quarter of 2011, the Company received the first installment of $24 upon signing the agreement. During the third quarter of 2012, the Company received the second installment of $36. The Company is re-investing these payments to relocate its soap production to a new state-of-theart facility to be constructed at its Mission Hills, Mexico site, to relocate its commercial and technology operations within Mexico City and to prepare the existing site for transfer. As a result, the Company expects to make capital improvements and incur costs to exit the site through These exit costs will primarily be related to staff leaving indemnities, accelerated depreciation and demolition to make the site building-ready. During the three months ended March 31, 2013 and 2012, the Company incurred $5 and $7 of pretax costs ( $3 and $5 of aftertax costs), respectively, related to the sale. 5. Restructuring and Related Implementation Charges In the fourth quarter of 2012, the Company commenced a four -year Global Growth and Efficiency Program (the 2012 Restructuring Program) for sustained growth. The program s initiatives are expected to help Colgate ensure continued solid worldwide growth in unit volume, organic sales and earnings per share and enhance its global leadership positions in its core businesses. Implementation of the 2012 Restructuring Program is projected to result in cumulative pretax charges, once all phases are approved and implemented, totaling between $1,100 and $1,250 ( $775 and $875 aftertax), which are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits ( 50% ); asset-related costs, primarily Incremental Depreciation and Asset Impairments ( 15% ); and Other charges, 6

9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) which include contract termination costs, consisting primarily of implementation-related charges resulting directly from exit activities ( 20% ) and the implementation of new strategies ( 15% ). The anticipated pretax charges for 2013 are expected to amount to approximately $260 to $310 ( $185 to $220 aftertax). Over the course of the 2012 Restructuring Program, it is estimated that approximately 75% of the charges will result in cash expenditures. It is expected that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America ( 15% ), Europe/South Pacific ( 20% ), Latin America ( 5% ), Greater Asia/Africa ( 10% ), Hill s Pet Nutrition ( 15% ) and Corporate ( 35% ), which includes substantially all of the costs related to the implementation of new strategies, noted above, on a global basis. Restructuring and implementation-related charges are reflected in the income statement as follows: Three Months Ended March 31, 2013 Cost of sales $ 8 Selling, general and administrative expenses 8 Other (income) expense, net 50 Total 2012 Restructuring Program charges, pretax $ 66 Total 2012 Restructuring Program charges, aftertax $ 52 Restructuring and related implementation charges in the preceding table are recorded in the Corporate segment as these initiatives are predominantly centrally directed and controlled and are not included in internal measures of segment operating performance. Total first quarter 2013 charges relate to the 2012 Restructuring Program in Latin America ( 15% ), Europe/South Pacific ( 31% ), Greater Asia/Africa ( 6% ), Hill s Pet Nutrition ( 3% ) and Corporate ( 45% ). Total program-to-date accumulated charges relate to the 2012 Restructuring Program in North America ( 1% ), Latin America ( 6% ), Europe/South Pacific ( 45% ), Greater Asia/Africa ( 4% ), Hill's Pet Nutrition ( 3% ) and Corporate ( 41% ). Since the inception of the 2012 Restructuring Program in the fourth quarter of 2012, the Company has incurred total pretax cumulative charges of $155 ( $122 aftertax) in connection with the implementation of various projects as follows: Cumulative Charges as of March 31, 2013 Employee-Related Costs $ 93 Incremental Depreciation 6 Asset Impairments Other 56 Total $ 155 Costs incurred since inception primarily concern projects related to the simplification and streamlining of the Company's research and development capabilities and oral care supply chain, both in Europe, as well as the restructuring of certain commercial operations in advance of implementing an overall hubbing strategy and other exit costs related to office consolidation. 7

10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table summarizes the activity for the restructuring and implementation-related charges discussed above and the related accrual: Employee-Related Costs Incremental Depreciation Asset Impairments Other Total Balance at December 31, 2012 $ 84 $ $ $ 5 $ 89 Charges Cash payments (4) (22) (26) Charges against assets (6) (6) Foreign exchange Balance at March 31, 2013 $ 95 $ $ $ 28 $ 123 Employee-related costs primarily include severance and other termination benefits and are calculated based on long-standing benefit practices, local statutory requirements and, in certain cases, voluntary termination arrangements. Incremental depreciation is recorded to reflect changes in useful lives and estimated residual values for long-lived assets that will be taken out of service prior to the end of their normal service period. Asset impairments are recorded to write down assets held for sale or disposal to their fair value based on amounts expected to be realized. Charges against assets within Asset impairments are net of cash proceeds pertaining to the sale of certain assets. Other charges consist primarily of implementation-related charges resulting directly from exit activities and the implementation of new strategies as a result of the 2012 Restructuring Program. These charges included third-party incremental costs of $11 related to the development and implementation of new business and strategic initiatives and contract termination costs of $11 directly related to the 2012 Restructuring Program. These charges were expensed as incurred. These charges also included a charge for other exit costs related to office space consolidation of $ Inventories Inventories by major class are as follows: March 31, 2013 December 31, 2012 Raw materials and supplies $ 346 $ 362 Work-in-process Finished goods Total Inventories $ 1,371 $ 1,365 8

11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Shareholders Equity Changes in the components of Shareholders Equity for the three months ended March 31, 2013 are as follows: Common Stock Additional Paid-in Capital Colgate-Palmolive Company Shareholders Equity Unearned Compensation Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Balance, December 31, 2012 $ 733 $ 1,551 $ (41) $ (14,386) $ 16,953 $ (2,621) $ 201 Net income Other comprehensive income, net of tax (37) Dividends (608) Stock-based compensation expense 32 Shares issued for stock options Shares issued for restricted stock awards (46) 46 Treasury stock acquired (385) Other 2 6 Balance, March 31, 2013 $ 733 $ 1,563 $ (35) $ (14,636) $ 16,805 $ (2,658) $ 247 Accumulated other comprehensive income (loss) includes cumulative foreign currency translation losses of $1,609 and $1,664 at December 31, 2012 and March 31, 2013, respectively and unrecognized pension and other retiree benefit costs of $1,053 and $1,033 at December 31, 2012 and March 31, 2013, respectively. 8. Earnings Per Share Income Three Months Ended March 31, 2013 March 31, 2012 Shares (millions) Per Share Income Net income attributable to Colgate- Palmolive Company $ 460 $ 593 Shares (millions) Per Share Basic EPS $ $ 1.24 Stock options and restricted stock Diluted EPS $ $ 0.97 $ $ 1.23 For the three months ended March 31, 2013 and 2012, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 1,875,285 and 2,987,600, respectively. 9

12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Common Stock Split On March 7, 2013, the Company's Board of Directors approved a two -for-one stock split of the Company's common stock to be effected through a 100% stock dividend. The record date for the two-for-one split was the close of business on April 23, 2013, and share distribution will occur on May 15, As a result of the split, shareholders will receive one additional share of Colgate common stock, par value $ 1.00, for each share they hold as of the record date. All per share amounts and number of shares outstanding in these Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements are presented on a pre-split basis. As a result of the stock split, all historical per share data and number of shares outstanding presented in future financial statements will be retroactively adjusted. Pro forma earnings per share is as follows, giving retroactive effect to the stock split: For the three months ended March 31, Basic Diluted Net income attributable to Colgate Palmolive Company $ 460 $ 593 $ 460 $ 593 Weighted-average shares outstanding, as reported Weighted-average shares outstanding, pro forma Earnings per share, as reported $ 0.98 $ 1.24 $ 0.97 $ 1.23 Earnings per share, pro forma $ 0.49 $ 0.62 $ 0.48 $ 0.61 In addition, the impact on the Balance Sheet as a result of the stock split is an increase of $733 to Common Stock and an offsetting reduction in Additional paid-in capital. 10

13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 10. Other Comprehensive Income (Loss) Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the three months ended March 31, 2013 and 2012 were as follows: Pre-tax Net of Tax Pre-tax Net of Tax Cumulative translation adjustments $ (45) $ (55) $ 171 $ 179 Pension and other benefits: Net actuarial gains (losses) and prior service costs arising during the period 3 2 (2) (1) Amortization of net actuarial losses, transition and prior service costs (1) Retirement Plan and other retiree benefit adjustments Available-for-sale securities: Unrealized gains (losses) on available-for-sale securities (141) (90) Reclassification of (gains) losses into net earnings on available-for-sale securities (2) Gains (losses) on available-for sale securities (8) (4) Cash flow hedges: Unrealized gains (losses) on cash flow hedges Reclassification of (gains) losses into net earnings on cash flow hedges (3) (4) (3) Gains (losses) on cash flow hedges Total Other comprehensive income $ (21) $ (37 ) $ 217 $ 208 (1) These Other comprehensive income (loss) components are included in the computation of net periodic benefit cost. See Note 11, Retirement Plans and Other Retiree Benefits for additional details. (2) Represents the one-time loss related to the remeasurement of the fixed interest rate bonds in Venezuela which was recorded in Other (income) expense, net. See Note 14, Fair Value Measurements and Financial Instruments for additional details. (3) These (gains) losses are reclassified into Cost of Sales. See Note 14, Fair Value Measurements and Financial Instruments for additional details. 11. Retirement Plans and Other Retiree Benefits Components of net periodic benefit cost for the three months ended March 31, 2013 and 2012 were as follows: United States Pension Benefits International Three Months Ended March 31, Other Retiree Benefits Service cost $ 7 $ 7 $ 6 $ 5 $ 4 $ 3 Interest cost Expected return on plan assets (29) (28) (6) (6) (1) (1) Amortization of transition and prior service costs (credits) Amortization of actuarial loss Net periodic benefit cost $ 19 $ 21 $ 10 $ 10 $ 18 $ 18 11

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15 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12. Contingencies As a global company serving consumers in more than 200 countries and territories, the Company is routinely subject to a wide variety of legal proceedings. These include disputes relating to intellectual property, contracts, product liability, marketing, advertising, foreign exchange controls, antitrust and trade regulation, as well as labor and employment, environmental and tax matters. Management proactively reviews and monitors the Company s exposure to, and the impact of, environmental matters. The Company is party to various environmental matters and, as such, may be responsible for all or a portion of the cleanup, restoration and post-closure monitoring of several sites. As a matter of course, the Company is regularly audited by the IRS and other tax authorities around the world in countries where it conducts business. In this regard, all U.S. federal income tax returns through December 31, 2007 have been audited by the IRS and there are limited matters in administrative appeals for years 2002 through 2007, the settlement of which is not expected to have a material adverse effect on the Company s results of operations, cash flows or financial condition. With a few exceptions, the Company is no longer subject to U.S., state and local income tax examinations for the years prior to In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitations for tax audits generally ranging from three to six years. Estimated incremental tax payments related to potential disallowances for subsequent periods are not expected to be material. The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss, or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. For those matters disclosed below, the Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $0 to approximately $225 (based on current exchange rates). The estimates included in this amount are based on the Company s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the matters in question. Thus, the Company s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above. Based on current knowledge, management does not believe that the ultimate resolution of loss contingencies arising from the matters discussed herein will have a material effect on the Company s consolidated financial position or its ongoing results of operations or cash flows. However, in light of the inherent uncertainties noted above, an adverse outcome in one or more of these matters could be material to the Company s results of operations or cash flows for any particular quarter or year. Brazilian Matters In 2001, the Central Bank of Brazil sought to impose a substantial fine on the Company s Brazilian subsidiary based on alleged foreign exchange violations in connection with the financing of the Company s 1995 acquisition of the Kolynos oral care business from Wyeth (formerly American Home Products) (the Seller), as described in the Company s Form 8-K dated January 10, The Company appealed the imposition of the fine to the Brazilian Monetary System Appeals Council (the Council) and, on January 30, 2007, the Council decided the appeal in the Company s favor, dismissing the fine entirely. However, certain tax and civil proceedings that began as a result of this Central Bank matter are still outstanding as described below. 12

16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Brazilian internal revenue authority has disallowed interest deductions and foreign exchange losses taken by the Company s Brazilian subsidiary for certain years in connection with the financing of the Kolynos acquisition. The tax assessments with interest, at the current exchange rate, approximate $130. The Company has been disputing the disallowances by appealing the assessments within the internal revenue authority s appellate process with the following results to date: In June 2005, the First Board of Taxpayers ruled in the Company s favor and allowed all of the previously claimed deductions for 1996 through In March 2007, the First Board of Taxpayers ruled in the Company s favor and allowed all of the previously claimed deductions for 1999 through The tax authorities appealed these decisions to the next administrative level. In August 2009, the First Taxpayers Council (the next and final administrative level of appeal) overruled the decisions of the First Board of Taxpayers, upholding the majority of the assessments, disallowing a portion of the assessments and remanding a portion of the assessments for further consideration by the First Board of Taxpayers. The Company has filed a motion for clarification with a special appeals chamber of the Taxpayers Council and further appeals are available within the Brazilian federal courts. The Company intends to challenge these assessments vigorously. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel and other advisors, that the disallowances are without merit and that the Company should ultimately prevail on appeal, if necessary, in the Brazilian federal courts. In 2002, the Brazilian Federal Public Attorney filed a civil action against the federal government of Brazil, Laboratorios Wyeth-Whitehall Ltda. (the Brazilian subsidiary of the Seller) and the Company, as represented by its Brazilian subsidiary, seeking to annul an April 2000 decision by the Brazilian Board of Tax Appeals that found in favor of the Seller s Brazilian subsidiary on the issue of whether it had incurred taxable capital gains as a result of the divestiture of Kolynos. The action seeks to make the Company s Brazilian subsidiary jointly and severally liable for any tax due from the Seller s Brazilian subsidiary. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the Company should ultimately prevail in this action. The Company intends to challenge this action vigorously. In December 2005, the Brazilian internal revenue authority issued to the Company s Brazilian subsidiary a tax assessment with interest and penalties of approximately $80, at the current exchange rate, based on a claim that certain purchases of U.S. Treasury bills by the subsidiary and their subsequent disposition during the period 2000 to 2001 were subject to a tax on foreign exchange transactions. The Company is disputing the assessment within the internal revenue authority s administrative appeals process. In October 2007, the Second Board of Taxpayers, which has jurisdiction over these matters, ruled in favor of the internal revenue authority. In January 2008, the Company appealed this decision, and in January 2012, a special appeals chamber of the Taxpayers Council denied the Company s appeal. The Company plans to appeal this decision. Although there can be no assurances, management believes, based on the advice of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should prevail on appeal, if not at the administrative level, in the Brazilian federal courts. The Company intends to challenge this assessment vigorously. European Competition Matters Since February 2006, the Company has learned that investigations relating to potential competition law violations involving the Company s subsidiaries had been commenced by governmental authorities in a number of European countries and by the European Commission. The Company understands that substantially all of these investigations also involve other consumer goods companies and/or retail customers. The status of the various pending matters is discussed below. 13

17 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fines have been imposed on the Company in the following matters, although, as noted below, the Company is appealing each of these fines: In December 2009, the Swiss competition law authority imposed a fine of $6 on the Company s GABA subsidiary for alleged violations of restrictions on parallel imports into Switzerland. The Company is appealing the fine in the Swiss courts. In January 2010, the Spanish competition law authority found that four suppliers of shower gel had entered into an agreement regarding product down-sizing, for which Colgate s Spanish subsidiary was fined $3. The Company is appealing the fine in the Spanish courts. In December 2010, the Italian competition law authority found that 16 consumer goods companies, including the Company s Italian subsidiary, exchanged competitively sensitive information in the cosmetics sector, for which the Company s Italian subsidiary was fined $3. The Company is appealing the fine in the Italian courts. In December 2011, the French competition law authority found that four consumer goods companies had entered into agreements on pricing and promotion of heavy duty detergents for which Colgate s French subsidiary was fined $46 in connection with a divested business. The Company is appealing the fine in the French courts. In March 2012, the French competition law authority found that three pet food producers, including the Company s Hill s France subsidiary, had violated the competition law, for which it imposed a fine of $7 on the Company s Hill s France subsidiary for alleged restrictions on exports from France. The Company is appealing the fine in the French courts. Currently, formal claims of violations, or statements of objections, are pending against the Company as follows: The Belgian competition law authority has alleged that 11 branded goods companies, including the Company s Belgian subsidiary, assisted retailers to coordinate their retail prices on the Belgian market. The Company is in the process of responding to this statement of objections. Investigations are ongoing in France and Greece, but no formal claims of violations have been filed in these jurisdictions except in the two French matters noted above. Since December 31, 2012, the following matter has been resolved: In March 2013, the German competition authority completed its investigation and no penalties were imposed against the Company or its German subsidiary. The Company s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. The Company has undertaken a comprehensive review of its selling practices and related competition law compliance in Europe and elsewhere and, where the Company has identified a lack of compliance, it has undertaken remedial action. Competition and antitrust law investigations often continue for several years and can result in substantial fines for violations that are found. While the Company cannot predict the final financial impact of these competition law issues as these matters may change, the Company evaluates developments in these matters quarterly and accrues liabilities as and when appropriate. ERISA Matters In October 2007, a putative class action claiming that certain aspects of the cash balance portion of the Colgate-Palmolive Company Employees Retirement Income Plan (the Plan) do not comply with the Employee Retirement Income Security Act was filed against the Plan and the Company in the United States District Court for the Southern District of New York. Specifically, Proesel, et al. v. Colgate- Palmolive Company Employees Retirement Income Plan, et al. alleges improper calculation of lump sum distributions, age discrimination and failure to satisfy minimum accrual requirements, thereby resulting in the underpayment of benefits to Plan participants. 14

18 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Two other putative class actions filed earlier in 2007, Abelman, et al. v. Colgate-Palmolive Company Employees Retirement Income Plan, et al., in the United States District Court for the Southern District of Ohio, and Caufield v. Colgate-Palmolive Company Employees Retirement Income Plan, in the United States District Court for the Southern District of Indiana, both alleging improper calculation of lump sum distributions and, in the case of Abelman, claims for failure to satisfy minimum accrual requirements, were transferred to the Southern District of New York and consolidated with Proesel into one action, In re Colgate-Palmolive ERISA Litigation. The complaint in the consolidated action alleges improper calculation of lump sum distributions and failure to satisfy minimum accrual requirements, but does not include a claim for age discrimination. The relief sought includes recalculation of benefits in unspecified amounts, pre- and postjudgment interest, injunctive relief and attorneys fees. This action has not been certified as a class action as yet. The parties are in discussions via non-binding mediation to determine whether the action can be settled. The Company and the Plan intend to contest this action vigorously should the parties be unable to reach a settlement. 13. Segment Information Effective January 1, 2013, the Company realigned the geographic structure of its North America and Latin America reportable operating segments. In order to better leverage Latin America management's knowledge of emerging market consumers to accelerate growth in the region, management responsibility for the Puerto Rico and CARICOM operations was transferred from North America to Latin America management. Accordingly, commencing with the Company's financial reporting for the quarter ended March 31, 2013, the results of the Puerto Rico and CARICOM operations, which represent less than 1% of the Company's global business, will be reported in the Latin America reportable operating segment. Previously, Puerto Rico and CARICOM represented approximately 4% of Net sales of North America and now represent approximately 3% of Net sales of Latin America. The Company reclassified its historical geographic segment information to conform to the new reporting structure which results in a slight modification to the geographic components of the Oral, Personal and Home Care segment, with no impact on historical Company results overall. The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of the operating segment performance because it excludes the impact of corporate-driven decisions related to interest expense and income taxes. Corporate operations include costs related to stock options and restricted stock awards, research and development costs, Corporate overhead costs, restructuring and related implementation costs and gains and losses on sales of non-core product lines and assets. The Company reports these items within Corporate operations as they relate to Corporate-based responsibilities and decisions and are not included in the internal measures of segment operating performance used by the Company in order to measure the underlying performance of the business segments. 15

19 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Net sales and Operating profit by segment were as follows: Three Months Ended March 31, Net sales Oral, Personal and Home Care North America $ 764 $ 724 Latin America 1,214 1,201 Europe/South Pacific Greater Asia/Africa Total Oral, Personal and Home Care 3,781 3,658 Pet Nutrition Total Net sales $ 4,315 $ 4,200 Operating profit Oral, Personal and Home Care North America $ 215 $ 177 Latin America Europe/South Pacific Greater Asia/Africa Total Oral, Personal and Home Care Pet Nutrition Corporate (369) (140) Total Operating profit $ 742 $ 938 For the three months ended March 31, 2013, Corporate Operating profit (loss) includes charges of $66 associated with the 2012 Restructuring Program, a one-time $172 charge for the impact of the devaluation in Venezuela and costs of $5 related to the sale of land in Mexico. For further information regarding the 2012 Restructuring Program, refer to Note 5, Restructuring and Related Implementation Charges. For further information regarding the Venezuela devaluation, refer to Note 15, Venezuela. For the three months ended March 31, 2012, Corporate Operating profit (loss) included costs of $7 related to the sale of land in Mexico and $5 associated with business realignment and other cost-saving initiates. For further information regarding the sale of land in Mexico, refer to Note 4, Acquisitions and Divestitures. 14. Fair Value Measurements and Financial Instruments The Company uses available market information and other valuation methodologies in assessing the fair value of financial instruments. Judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, changes in assumptions or the estimation methodologies may affect the fair value estimates. The Company is exposed to credit losses in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely as it is the Company s policy to contract only with diverse, credit-worthy counterparties based upon both strong credit ratings and other credit considerations. The Company is exposed to market risk from foreign currency exchange rates, interest rates and commodity price fluctuations. Volatility relating to these exposures is managed on a global basis by utilizing a number of techniques, including working capital management, supplier agreements, selling price increases, selective borrowings in local currencies and entering into selective derivative instrument transactions, issued with standard features, in accordance with the Company s treasury and risk management policies, which prohibit the use of derivatives for speculative purposes and 16

20 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) leveraged derivatives for any purpose. It is the Company s policy to enter into derivative instrument contracts with terms that match the underlying exposure being hedged. Hedge ineffectiveness, if any, is not material for any period presented. The Company s derivative instruments include interest rate swap contracts, foreign currency contracts and commodity contracts. The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates (Level 2 valuation). Foreign currency contracts consist of forward, option and swap contracts utilized to hedge a portion of the Company s foreign currency purchases, assets and liabilities arising in the normal course of business as well as the net investment in certain foreign subsidiaries. These contracts are valued using observable market rates (Level 2 valuation). Commodity futures contracts are utilized to hedge the purchases of raw materials used in the Company s operations. These contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of foreign currency and commodity contracts generally does not exceed twelve months. The following summarizes the fair value of the Company s derivative instruments and other financial instruments at March 31, 2013 and December 31, 2012 : Assets Liabilities Account Fair Value Account Fair Value Designated derivative instruments 3/31/13 12/31/12 3/31/13 12/31/12 Interest rate swap contracts Other current assets $ 1 $ 3 Other accruals $ $ Interest rate swap contracts Other assets Other liabilities Foreign currency contracts Other current assets 15 7 Other accruals 8 10 Foreign currency contracts Other assets Other liabilities Commodity contracts Other current assets 1 Other accruals 1 Total designated $ 81 $ 65 $ 9 $ 10 Derivatives not designated Foreign currency contracts Other assets $ 5 $ Other liabilities $ $ 1 Total not designated $ 5 $ $ $ 1 Total derivative instruments $ 86 $ 65 $ 9 $ 11 Other financial instruments Marketable securities Other current assets $ 164 $ 116 Available-for-sale securities Other assets Total other financial instruments $ 738 $ 734 The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of March 31, 2013 and December 31, The estimated fair value of the Company s long-term debt, including the current portion, as of March 31, 2013 and December 31, 2012, was $5,711 and $5,484, respectively, and the related carrying value was $5,345 and $5,176, respectively. The estimated fair value of long-term debt was derived principally from quoted prices on the Company s outstanding fixed-term notes (Level 2 valuation). 17

21 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fair value hedges The Company has designated all interest rate swap contracts and certain foreign currency forward and option contracts as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings. The impact of foreign currency contracts is recognized in Selling, general and administrative expenses and the impact of interest rate swap contracts is recognized in Interest expense, net. Activity related to fair value hedges recorded during the three -month periods ended March 31, 2013 and 2012 was as follows: Cash flow hedges Foreign Currency Contracts Interest Rate Swaps All of the Company s commodity contracts and certain foreign currency forward contracts have been designated as cash flow hedges, for which the effective portion of the gain or loss is reported as a component of Other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Activity related to cash flow hedges recorded during the three -month periods ended March 31, 2013 and 2012 was as follows: The net gain (loss) recognized in OCI for both foreign currency contracts and commodity contracts is expected to be recognized in Cost of sales within the next twelve months. 18 Total Foreign Currency Contracts Interest Rate Swaps Notional Value at March 31, $ 1,085 $ 1,338 $ 2,423 $ 674 $ 1,668 $ 2,342 Three months ended March 31: Gain (loss) on derivative 12 (7) 5 1 (2) (1) Gain (loss) on hedged items (12) 7 (5) (1) 2 1 Foreign Currency Contracts Commodity Contracts Total Foreign Currency Contracts Commodity Contracts Notional Value at March 31, $ 446 $ 52 $ 498 $ 474 $ 27 $ 501 Three months ended March 31: Gain (loss) recognized in OCI 8 (1) Gain (loss) reclassified into Cost of sales (1) Total Total

22 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Net investment hedges The Company has designated certain foreign currency forward contracts and option contracts and certain foreign currency-denominated debt as net investment hedges, for which the gain or loss on the instrument is reported as a component of Currency translation adjustments within OCI, along with the offsetting gain or loss on the hedged items. Activity related to net investment hedges recorded during the three -month periods ended March 31, 2013 and 2012 was as follows: Derivatives Not Designated as Hedging Instruments Derivatives not designated as hedging instruments for each period consist of a cross-currency swap that serves as an economic hedge of a foreign currency deposit, for which the gain or loss on the instrument and the offsetting gain or loss on the hedged item are recognized in Other (income) expense, net for each period. Activity related to these contracts during the three -month periods ended March 31, 2013 and 2012 was as follows: Other Financial Instruments Foreign Currency Contracts Other financial instruments are classified as Other current assets or Other assets Foreign Currency Debt Other financial instruments classified as Other current assets include marketable securities, which consist of bank deposits of $140 with original maturities greater than 90 days (Level 1 valuation) and the current portion of bonds issued by the Venezuelan government (Level 2 valuation) in the amount of $24. The long-term portion of these bonds in the amount of $ 574 is included in Other assets. Through its subsidiary in Venezuela, the Company is invested in U.S. dollar-linked, devaluation-protected bonds and fixed interest rate bonds, both of which are issued by the Venezuelan government. These bonds are actively traded and, therefore, are considered Level 2 investments as their values are determined based upon observable market-based inputs or unobservable inputs that are corroborated by market data. As of March 31, 2013, the U.S. dollar-linked, devaluation protected bonds and the fixed interest rate bonds had fair market values of $254 and $344, respectively. These investments are considered available-for-sale securities and are included in Other assets. Total Foreign Currency Contracts Foreign Currency Debt Notional Value at March 31, $ 536 $ 375 $ 911 $ 537 $ 251 $ 788 Three months ended March 31: Gain (loss) on instruments (19) (6) (25) Gain (loss) on hedged items (13) (13) (26) Cross-currency Swap Total Cross-currency Swap Notional Value at March 31, $ 96 $ 96 Three months ended March 31: Gain (loss) on instrument 6 (3) Gain (loss) on hedged item (6) 3 19

23 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table presents a reconciliation of the Venezuelan bonds at fair value for the three months ended March 31, 2013 and 2012: Beginning balance as of January 1, $ 642 $ 236 Unrealized gain (loss) on investment (141) 16 Purchases and sales during the period 97 9 Ending balance as of March 31, $ 598 $ 261 The Unrealized loss on investment consisted primarily of a one-time loss of $133 in the first quarter of 2013 related to the remeasurement of fixed interest rate bonds at February 9, 2013, the date of the devaluation. For further information regarding Venezuela and the devaluation, refer to Note 15, Venezuela below. 15. Venezuela Venezuela has been designated hyper-inflationary and, therefore, the functional currency for the Company s Venezuelan subsidiary ( CP Venezuela ) is the U.S. dollar and Venezuelan currency fluctuations are reported in income. The Venezuelan government devalued its currency effective February 9, As a result of the devaluation the official exchange rate changed from 4.30 to 6.30 Venezuela bolivar fuerte per dollar. The Company incurred a one-time, pretax loss of $172, aftertax loss of $111 ( $0.23 per common share, diluted) in the first quarter of 2013 related to the remeasurement of the net monetary assets included in the local balance sheet at the date of the devaluation. The Company remeasured the financial statements of CP Venezuela at the rate at which it expects to remit future dividends, which currently is As the local currency operations in Venezuela will now translate into fewer U.S. dollars, this had and will continue to have an ongoing adverse effect on our reported results. For the three months ended March 31, 2013, CP Venezuela represented approximately 4% of the Company s consolidated Net sales. At March 31, 2013, CP Venezuela s bolivar fuerte-denominated net monetary asset position, which would be subject to remeasurement in the event of a further devaluation, was approximately $400. This amount does not include $254 of devaluation-protected bonds issued by the Venezuelan government, as these bonds provide protection against devaluations by adjusting the amount of bolivares fuerte received at maturity for any devaluation subsequent to issuance. 20